Despite reporting sharp declines in its profits last year, the Greek banking sector is not yet out of the woods and still faces an uncertain future, P&K Research cautioned in a report yesterday. «Although we think the worst is over, the outlook for 2003 remains hazy,» wrote analyst Manos Giakoumis. The country’s five major banks recorded a 40.3 percent fall in 2002 earnings per share as the weak stock market sliced three-quarters off their trading income. Pretax profits plunged by 37.4 percent, with Commercial Bank, recently renamed Emporiki Bank, the worst hit. Giakoumis said the five banks could see a recovery in their bottom-line earnings this year but downside risks could temper any improvement. One of the factors likely to hinder growth is increasing credit risks related to the continued credit boom. According to Bank of Greece statistics, borrowing by companies and households in December 2002 rose 16.9 percent, a slower pace than the 18.2 percent of the previous month. Growth, however, could pick up once the central bank lifts consumer credit limits in April with the launch of the credit bureau, Teiresias. The new system, however, does not cover loans already given out. Giakoumis said the problem with Greek banks is their lack of historical data on their clients, which raises concerns over their non-performing loan ratios. The mandatory reporting of balance sheets this year according to International Accounting Standards could open up a can of worms for the local banking sector as it would need to incorporate pension fund liabilities, value securities at fair values and revalue real estate property at market values, among other changes. The geopolitical uncertainties and sluggish stock markets could also put a brake on a recovery, Giakoumis said. While markets around the world have staged sharp rallies this week following the launch of military action in Iraq, a prolonged conflict could deflate the bubble of optimism and send stocks crashing. Back at home, inflexible labor laws mean banks are restricted in their ability to contain personnel costs, with the cost-to-income ratio a high 67 percent.